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Tax Systems in European Union Countries

The tax-to-GDP ratio rose steadily in most EU countries up to the late 1990s, largely reflecting a sustained expansion of public sector commitments to welfare provision. Since the late 1990s, many EU countries have cut tax rates. However, the tax burden in the EU area remains much higher than in most other economies. The tax mix is also different, with high tax wedges on labour and a stronger reliance on consumption and environmentally-related taxes. Recent measures targeted at lowering the tax burden on labour, in particular at the lower end of the income scale, have had promising results in terms of employment growth, showing how tax design is an important influence on countries' performances. While there is not much room for cutting taxes significantly without downsizing public spending, further rebalancing the tax burden away from labour could contribute to better employment performance. Greater reliance on property taxes, which are low by international standards, could be envisaged. In addition, reconsidering the extensive use of reduced VAT rates and tax incentives targeted to specific saving vehicles could raise the yield of consumption and capital income taxes, respectively, while reducing non-neutralities of the tax system. Finally, the free movement of goods, people and capital within the EU area, combined with the advent of the single currency, has also affected the design of national tax systems and has brought to the fore a number of international taxation issues. Thus, EU countries' experience in reforming their tax system may provide useful insights for other countries and regions where international integration is deepening.